Sometimes, even well-respected stalwarts of industry wind up in Wall Street's bargain bin. The question for long-term investors is whether they belong there.
Case in point: IBM (NYSE: IBM), Intel (NASDAQ: INTC), and HP Inc. (NYSE: HPQ) -- a trio of tech giants operating in different sandboxes, but whose stocks have been beaten down for similar reasons. The market fears that their pivots toward future growth won't deliver the kind of earnings they had in the past.
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IBM CEO Ginni Rometty is transforming Big Blue into a company focused on cutting-edge new markets via its strategic imperatives units: the cloud, data analytics, mobile, and security. Intel, too, is in the midst of change, but few investors seem impressed. As for HP Inc., CEO Dion Weisler is reinventing how the PC king develops and sells its products.
But beyond their bargain-basement stock valuations, there's one more thing they all have in common: industry-leading dividend yields. Should you be interested? Let's examine some pros and cons.
Give us a moment
The "problem" for IBM is its deteriorating top line. Revenues dropped 3% last quarter to $19.3 billion, the company's 21st straight period of total sales declines. The resulting pessimism has pushed IBM stock price down to just 10 times future earnings, nearly half the industry average.
Yet all is not lost, particularly when one looks at IBM's fast-growing cloud sales. The cloud represents an outstanding opportunity, and with its annual run rate of $15.1 billion, IBM is a leader in the space. Better still, cloud software-as-a-service (SaaS) revenues are tracking at $8.8 billion over the past 12 months, a 30% jump year-over-year. Cloud-based software is expected to lead the charge on the sales front in the coming years, and IBM is near the top of the list of providers.
IBM has also been focused on cutting overhead, which it did by 5% last quarter, contributing to its 11% decline in operating expenses in the first half of 2017. For value investors in search of income, IBM's 4.1% dividend yield at current prices is nearly twice that of the industry average 2.1% yield.
Is anyone watching?
Intel continues to post record revenue, but as with IBM, investors don't seem to care as it continues its transformation -- in this case, into a "data-center-first" chip provider. Last quarter's $14.8 billion in sales, a 9% improvement, raised the bar again for Intel, and earnings per share of $0.72 (excluding one-time items) were an impressive 22% higher year over year.
Operating expenses, another focus of CEO Brian Krzanich, were down 21% to $5.27 billion, which explains Intel's strong bottom line. Outside of its smallish programmable solutions unit, all the divisions increased their revenues last quarter. The PC unit's sales rose 12% to $8.2 billion, data center was up 9% to $4.4 billion, Internet of Things (IoT) grew 26% to $720 million, and the memory division reported $874 million in revenue, a 58% increase.
Intel shares a couple of other commonalities with IBM: Its stock valuation is half the industry average, and its 3% dividend yield is more than adequate. So why is Intel stock on sale? Many pundits don't think Intel can continue to produce sales growth from its largest unit, PCs, and that view has investors convinced that the sky is falling. Thing is, PCs aren't dead, and some industry watchers believe we're at or near the bottom of their sales trough.
The undisputed king of the hill
Even if you don't follow the PC market, it was hard to miss the headlines last quarter: "Worldwide PC Sales Slide 4.3%." Intel and HP Inc. must be in trouble, right?
Not necessarily. Not only did Intel's PC chip sales increase, HP became the undisputed global leader in PC sales, though that fact made less of a splash given the dire headlines.
Other than Dell, which managed a meager 1.4% improvement, HP was the only other PC maker to report a sales increase last quarter, rising 3.3%, a gain that allowed it to overtake China rival Lenovo as the top dog with a 20.8% market share. It's no wonder HP reported a 10% improvement in revenue last quarter to $13.1 billion. Best of all, HP's gains were nearly across the board.
Notebook sales jumped 16% to $5 billion, desktop revenue from the "dying" PC unit rose 5%, and the once-beleaguered printing division reported a 6% sales increase to $4.7 billion. Weisler's focus on targeting niche markets for both PCs and printing is working wonders. Toss in a 2.75% dividend yield, and a stock valuation that's half the industry average, and it becomes clear that HP is a bargain worth reconsidering.
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